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SSJs and Commercial Purchasing Policy - Inventory to Product to Resell


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My main question revolves around whether SSJs are required to purchase commercial items that go into commercial and non-commercial products that are made and sold to the government.  I’ll caveat by saying these purchases are not directly tied to prime contracts. These are products/components purchases for inventory and then incorporated into a product sold to the government and, in some cases, other companies (we do have commercial price lists for some of these products).

Backstory – I work for a large defense contractor who historically provides services (very little product) to both Federal Civ and DoD clients. Over the last two years, we have acquired multiple product companies, which positions ourselves to sell those companies products (both commercial and non-commercial) as total package solutions (product & services) on a much larger scale. Our company has a certified purchasing system and a procurement policy that mostly aligns with FAR/DFAR as one would expect. The policy addresses indirect & direct purchasing/subcontracting, and the section addressing single/sole source requires SSJs for both indirect & direct purchasing.  

Issue - As we have integrated these new companies, rolling them in under our procurement policy has been a struggle as each did not have formal purchasing policies. So, the level of documentation we required (SSJ, formal solicitations, award justification, etc.) has been challenging. As you might imagine, the argument is, “Why is this required if we are buying is for inventory, not direct resell? Why is all this documentation required?”     

It would seem to reason that when purchasing commercial products that generally go into inventory before being assembled into a product, that areas of our policy would not apply, i.e., SSJs.  The product designs include specific components from specific suppliers (think circuit boards and the like), so to use other suppliers isn’t an option without adjustment to design; some have helped on the designs.  

Does it make sense to issue a procurement directive (of sorts) or a blanket SSJ for certain suppliers critical to the product, which would apply to all future purchases of those items from those suppliers? 

Opinion question: 

Given the change in our company (buying product companies), would it make sense to consider creating a separate commercial purchasing policy to govern purchases that are not directly tied to a prime contract?  I don’t know for sure, but I would assume companies like Raytheon, BAH, Northrup Grumman have separate purchasing policies to address the purchase of commercial materials for products that are made and resold.

Anyone aware of any resources that would address these types of purchases for products or maybe a sample commercial purchasing policy (something not tied to FAR/DFAR commercial items definition). A policy a company like Cisco or AT&T might use for buying the products they make?

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I don't think I can answer your questions directly. But I have some thoughts, as follows.

1. Single/sole source vs. competition seems to be unrelated to whether an item is commercial under FAR 2.101 or not. 

2. Do you have a lot of commercial prime contracts? If so, it might make sense to have one approach for those contracts vs. government contracts. But I'm not excited about having one approach for government prime buys versus indirect or inventory buys. I like to have one purchasing system with a consistent approach as much as possible.

3. The SSJ satisfies more than compliance with government/FAR requirements. It's also an anti-fraud control that keeps Joe PM from awarding a P.O. to his brother-in-law. It happens more than one might think, and it's important to have preventive controls in that area.

4. Given your company's recent acquisitions, you might want to take a fresh look at your make-or-buy program.

Sorry I can't be more helpful

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4 hours ago, here_2_help said:

2. Do you have a lot of commercial prime contracts? If so, it might make sense to have one approach for those contracts vs. government contracts. But I'm not excited about having one approach for government prime buys versus indirect or inventory buys. I like to have one purchasing system with a consistent approach as much as possible.

4. Given your company's recent acquisitions, you might want to take a fresh look at your make-or-buy program.

I would say that our business is probably 80-90% government contracts over selling to commercial companies.   makes sense to have a consistent approach over two different approaches. 

We certainly are looking at the make or buy program, as we do have some internal manufacturing capabilities.  .   I appreciate the response; it is helpful. 

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1 hour ago, Retreadfed said:

What do you mean by "certified purchasing system"?

Meaning, DCAA has come in and audited (CPSR audit) our procurement policy/files and determined that our purchasing policy is adequate.   This comes into play a lot around consent (FAR 52.244-2), which addresses having or not having an approved purchasing system.  

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I was associated with two large prime contractors that provided non-commercial end items to the Government. They each had separate business units that market commercial end items sold to anyone. There were written policies and procedures for these units. Those business units worked well because they were separate in every way. Some held commercial prime contracts. There are significant differences in prime contract execution between those business unit types and a prime contractor that has a non-commercial end item prime contract under which it buys commercial item qualified components for the end item.  Supplier management personnel supporting non-commercial end item prime contracts can and do purchase commercial items. It required doing so in accordance with policies and procedures per CPSR requirements and applied to overhead and inventory items. Many of the CPSR requirements are sound practices to me, such as having a source justification and price justification. However, commercial item businesses should operate in accordance with its successful commercial item practices as separate organizations.

    

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21 hours ago, jumpmanz5 said:

Meaning, DCAA has come in and audited (CPSR audit) our procurement policy/files and determined that our purchasing policy is adequate. 

DCAA does not do CPSRs.  They are conducted by DCMA for DoD.  Are you sure you have an approved purchasing system?

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4 minutes ago, Retreadfed said:

DCAA does not do CPSRs.  They are conducted by DCMA for DoD.  Are you sure you have an approved purchasing system?

Miss type... you are correct.   DCMA; they will be in our our office in a couple of months for our CPSR audit :o and yes we have an approved purchase system.  

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  • 5 months later...
On 1/12/2021 at 11:22 AM, jumpmanz5 said:

products/components purchases for inventory and then incorporated into a product sold to the government and, in some cases, other companies

My experience has been in professional service contracting, and now work for a company that also does manufacturing.

I have been searching WIFCON for this scenario. My employer has experienced growth through acquisitions similar to that described by jumpmanz5

My employer consists of business units, some that manufacture products which are sold to prime customers for government contracts, and, in some cases, other companies. We do not currently have officially determined commercial items, catalogs, or price lists. We are currently establishing policies and building processes to ensure we pass a future CPSR. 

I also agree with here_2_help:

On 1/13/2021 at 10:28 AM, here_2_help said:

I'm not excited about having one approach for government prime buys versus indirect or inventory buys. I like to have one purchasing system with a consistent approach as much as possible.

Question 1:  Where can I find guidance regarding competitive source selection requirements when some of the components and raw materials are purchased for and pulled from inventory, while others are purchased for a specific build?

Question 2:  If a particular quote to our prime customer includes components from multiple suppliers, does the micro-purchase threshold apply to each supplier, or to the whole lot of widgets being purchased for that particular build? I do not want to violate the rule about not separating purchases to avoid thresholds. If it applies to the whole lot, then we would be required to obtain 3 quotes in order to be compliant, correct?

Appreciate any help!

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2 hours ago, Kat said:

Question 2:  If a particular quote to our prime customer includes components from multiple suppliers, does the micro-purchase threshold apply to each supplier, or to the whole lot of widgets being purchased for that particular build? I do not want to violate the rule about not separating purchases to avoid thresholds. If it applies to the whole lot, then we would be required to obtain 3 quotes in order to be compliant, correct?

Appreciate any help!

Government procurement thresholds don't apply to contractor agreements with suppliers, unless expressly called out by a contract clause.

As you develop your company's purchasing system, you will want to define your own thresholds and purchasing methodologies. So long as they are compliant with the guidance that Vern identified, you should be fine.

But please let me re-emphasize that basing your company's purchasing system solely on the government model will not guarantee that you pass a CPSR, nor will it lead to particularly efficient practices.

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Thank you for your quick replies @here_2_helpand @Vern Edwards!

Very familiar with FAR 52.244-5; it is referenced in our draft policy.  I may die on my sword muttering ". . .  to the maximum practical extent . . it wasn't practical!".  In most cases our hardware pricing team is on a quick turn and it's not practical to seek new quotes for every order. 

18 hours ago, here_2_help said:

Government procurement thresholds don't apply to contractor agreements with suppliers, unless expressly called out by a contract clause.

The consultant who drafted our policy manual followed the government thresholds as a guideline; I'll work to ensure the policy language doesn't lock us into something unnecessarily restrictive. 

The CPSR Guidebook has an update, dated June 14, 2019.  It's always open on one monitor while working on these processes.

Thanks, again!

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On 1/12/2021 at 2:22 PM, jumpmanz5 said:

Does it make sense to issue a procurement directive (of sorts) or a blanket SSJ for certain suppliers critical to the product, which would apply to all future purchases of those items from those suppliers? 

By "blanket SSJ" are you talking about a class justification (FAR 6.303-1(d))? 

"All future purchases" is a bit much. 

A "procurement directive" cannot override USC (41 USC 3304). 

 

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On 6/17/2021 at 11:32 AM, Constricting Officer said:

By "blanket SSJ" are you talking about a class justification (FAR 6.303-14(d))? 

"All future purchases" is a bit much. 

A "procurement directive" cannot override USC (41 USC 3304). 

 

Was unable to locate FAR 6.303-14 (d). Also, the above requirements do not apply to contractors. Jumpmanz5, the original poster, appears to work for a contractor.

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11 hours ago, Neil Roberts said:

Was unable to locate FAR 6.303-14 (d).

Apologies - fat-fingered a 4 in there - 6.303-1(d).

11 hours ago, Neil Roberts said:

Also, the above requirements do not apply to contractors.

The OP is apparently questioning the practices of the government entity of which they are contracted with.

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On 6/17/2021 at 11:32 AM, Constricting Officer said:

By "blanket SSJ" are you talking about a class justification (FAR 6.303-1(d))? 

"All future purchases" is a bit much. 

A "procurement directive" cannot override USC (41 USC 3304). 

 

 

On 1/12/2021 at 11:22 AM, jumpmanz5 said:

Does it make sense to issue a procurement directive (of sorts) or a blanket SSJ for certain suppliers critical to the product, which would apply to all future purchases of those items from those suppliers?

A contractor should have a written procedure/policy that authorizes such activity. It should not be inconsistent with any CPSR requirements where the business is subject to a CPSR. Also, it should not be inconsistent with prime contract requirements (where the purchase is made under a prime contract) or inconsistent with other company policies/procedures, unless supported by adequate rationale.

Edited by Neil Roberts
modified last sentence re rationale
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On 6/16/2021 at 12:47 PM, Kat said:

Question 2:  If a particular quote to our prime customer includes components from multiple suppliers, does the micro-purchase threshold apply to each supplier, or to the whole lot of widgets being purchased for that particular build? I do not want to violate the rule about not separating purchases to avoid thresholds. If it applies to the whole lot, then we would be required to obtain 3 quotes in order to be compliant, correct?

Appreciate any help!

FAR 2.101 defines Micro-purchase in part as follows: Micro-purchase means an acquisition of supplies or services using simplified acquisition procedures, the aggregate amount of which does not exceed the micro-purchase threshold. From a prime contractor standpoint, I would expect a bid from a subcontractor to be supported by bids from its subcontractors for the entire quantity of requirements for each item being sourced.  

Edited by Neil Roberts
sp FAR
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On 1/12/2021 at 11:22 AM, jumpmanz5 said:

 

It would seem to reason that when purchasing commercial products that generally go into inventory before being assembled into a product, that areas of our policy would not apply, i.e., SSJs.  The product designs include specific components from specific suppliers (think circuit boards and the like), so to use other suppliers isn’t an option without adjustment to design; some have helped on the designs. 

Government contractors have been known to have required sources of supply called out on drawings for a product. The rationale for this call out has been known to be found in some other documentation in engineering and/or supplier management.

Edited by Neil Roberts
sp
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On 6/16/2021 at 12:47 PM, Kat said:

Question 1:  Where can I find guidance regarding competitive source selection requirements when some of the components and raw materials are purchased for and pulled from inventory, while others are purchased for a specific build?

You may find guidance by asking other company functions such as finance and program office. Why would a company wish to dispense with competitive sourcing of components included in an end item sold to customers?

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On 1/12/2021 at 11:22 AM, jumpmanz5 said:

My main question revolves around whether SSJs are required to purchase commercial items that go into commercial and non-commercial products that are made and sold to the government.  I’ll caveat by saying these purchases are not directly tied to prime contracts. These are products/components purchases for inventory and then incorporated into a product sold to the government and, in some cases, other companies (we do have commercial price lists for some of these products).

Perhaps you can clarify who is selling these items to the government and how they are sold without a contract to someone from the government?

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19 hours ago, Neil Roberts said:

Why would a company wish to dispense with competitive sourcing of components included in an end item sold to customers?

It depends. There are many reasons why a manufacturer would prefer establishing a long-term relationship with a qualified supplier rather than to engage in competitive "sourcing" (competitive bidding, competitive tendering) for anything other than commodities and commodified items. Among those reasons are: quality, delivery, and price.

See, for example: "Seven Reasons Competitive Tendering Fails (And What You Can Do About It)" 

https://www.processexcellencenetwork.com/innovation/columns/seven-reasons-competitive-tendering-fails-and-what

There are countless articles about the disadvantages of competitive bidding.

Competition does not necessarily make for better outcomes. It often does quite the opposite.

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3 hours ago, Neil Roberts said:

In my experience, it does not often make for worse outcomes, as you assert. Where it does, it should be supported by adequate documentation.      

Read some of the literature about "buying-in" and the making of extravagant promises in technical competitions.

See Caril et al, Competition and Contract Performance: Evidence for US Defense Procurement (2020):

Quote

We study the effects of increasing competition for public contracts through advertising. Publicizing contract opportunities promotes bidder participation, potentially leading to lower acquisition costs. Yet extensive advertising could also exacerbate the adverse selection of bidders on non-contractible quality dimensions. We study this trade-off in the context of procurement contracts for the U.S. Department of Defense. Our empirical strategy leverages a regulation that mandates agencies to publicize contract opportunities that exceed a certain threshold. We find that publicized contracts opportunities increases competition and leads to a different pool of vendors, which on average offer lower prices. However, we also find that the post-award performance of publicized contracts worsens, resulting in more post-award cost overruns and delays. The latter effect is driven by goods and services that are relatively more complex, highlighting the role of contract incompleteness. We show that for most product and service categories, the price gains ex-ante are modest relative to the increase in cost overruns ex-post. We conclude that publicizing contract opportunities in this context ends up “backfiring”, leading to net increases in procurement costs.

Competition is great for simple stuff. But it often creates problems when buying complex supplies and services. It prompts companies to make unrealistic technical promises and propose unrealistically low estimated costs and prices.

I'm not saying anything that hasn't been said many times before by many others.

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3 hours ago, Vern Edwards said:

Competition is great for simple stuff. But it often creates problems when buying complex supplies and services. It prompts companies to make unrealistic technical promises and propose unrealistically low estimated costs and prices.

I'm not . anything that hasn't been said many times before by many others.

The original poster is from the contractor side. To retain its approved system, the degree of competition and sometimes competition to the maximum practical extent, receives special attention in a CPSR review. I read the article above as a study of government contracts, not contractor subcontracts, as is the case for the original poster.  

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@Neil RobertsDid you read the blogpost I provided from the Deming website link?

In any case, keep in mind that my position is thte competitive bidding works best for simple and commodified requirements, but that it does not not necessarily best for complex requirements. I think there is ample published evidence in support of that proposition. I think that's why relational contracting is increasingly popular.

Competition can induce bidders to engage in undesirable behaviors, like overpromising and buying-in. The construction industry is a classic case. It is highly competitive and it is highly litigious. Competitive bidding is the norm.

Maybe we'll just have to disagree. 

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